New boss in place for a nationalised Northern Rock as options run out

The government was last night finalising contingency plans to nationalise Northern Rock after it appeared rebel shareholders in the stricken bank were close to wrecking ministers' hopes of a competitive private sale.

Ron Sandler, a senior banker and former adviser to prime minister Gordon Brown, confirmed at the weekend that he will become the boss of Northern Rock if it is taken into public ownership. Sandler, who was credited with rescuing the Lloyd's of London insurance market a decade ago, likened himself to a batsman waiting to take to the cricket field.

"My situation is that I'm in the pavilion with my pads on," he said. "Let's appreciate that I've been asked to do something in the event that the bank is taken into public ownership. I don't think you should read anything into my appointment. It's sensible contingency planning."

Treasury officials were understood to be lining up other executives and advisers in the event that nationalisation becomes the government's preferred option.

A report from the investment bank Goldman Sachs was expected last week ahead of the shareholders' meeting, but yesterday ministers were working on proposals without the dossier.

Goldman Sachs was given the job before Christmas of presenting the Treasury and the Northern Rock board with options for saving the bank and keeping it in private hands. However, it has proved difficult to persuade financial institutions to lend money to the bank and replace the £26bn outstanding Bank of England loan.

Executives from Goldmans have scoured the world's financial centres to find backers. Investment houses in China, Singapore and Dubai have been asked to consider lending to the bank after the credit crunch left most western banks short of funds.

Northern Rock maintained that it was pressing ahead with a sale. It is considering bids from a consortium led by Sir Richard Branson's Virgin Group and the private equity firm Olivant. Other solutions are believed to include converting the £26bn taxpayer loan into bonds that could be sold in smaller chunks to a variety of banks.

Analysts said the failure to find a buyer or any other robust long-term remedy for the bank's ills showed the government and the board were running out of options.

Shareholders are planning to severely curtail the powers of the Northern Rock board at a meeting tomorrow. They fear the board is tempted to sell the lender and its £110bn of mortgages "on the cheap" to Virgin.

The investor groups, which include two aggressive hedge fund managers, prefer the Olivant bid that has agreed to pay a higher price for their shares.

Shareholders were also expressing anger at the bank's decision to reward managers with bonuses, in some cases worth 100% of their salary over a year.

It emerged over the weekend that bosses at the bank sanctioned a bonus scheme to "handcuff" managers that paid a maximum £25,000 each quarter to hundreds of senior staff at a cost of £2.3m

Employees earning £100,000 a year could double their salary if the scheme is maintained for a year.

Robin Ashby of the Northern Rock Small Shareholders Association said he believed the scheme was excessive and was symptomatic of the directors' poor stewardship of the company. Ashby will attend the extraordinary shareholders' meeting tomorrow at which he and several other investor groups will seek to limit the board's ability to sell chunks of the business without a shareholder vote.

The board said that action could wreck a sale and has asked the 100,000-plus individual shareholders to vote against.

Last week the stricken mortgage bank was cold-calling its shareholders to determine whether it would lose the vote. It is understood many shareholders have backed the rebels in seeking to pass three motions at the meeting in Newcastle.

The Swedish pension fund AP2 - which holds a 1.8% stake - is reportedly set to support proposals from hedge funds RAB Capital and SRM Global.

John McFall, Labour MP and chairman of the Treasury select committee, said he was pleased Sandler had joined the government's rescue team. He told the BBC Sandler was "someone of the highest reputation".

"He has form in that he was parachuted into Lloyds Insurance and, indeed, he was also parachuted in as chief executive of NatWest when there was a hostile takeover. He earned his spurs there and he came out with credibility in the City."

FAQ: What's at stake at shareholders' meeting

Why are shareholders meeting?

Investors fear the board is planning to sell the bank without extracting the best price. They believe one of the two main bidders - Sir Richard Branson's Virgin Group - wants to buy it on the cheap.

What will be decided?

Without the later approval of shareholders, the bank will be stopped from

· issuing new shares above certain small thresholds

· selling assets which represent 5% or more of the total value of the group's assets, and buying assets if their value represents 20% or more of the total value of the group's assets

· authorising other members of the group to dispose of, transfer or issue shares.

Are the shareholders paranoid?

They fear the government controls the bank's board behind the scenes and will do anything to retrieve £26bn of taxpayer loans. The bid by Branson involves a rights issue that will leave them with only a fraction of the business. Rival Olivant has vowed to take only 20% of the business for itself.

Is the bank worth anything?

The mortgages sold by Northern Rock were assessed last year by the bidders and the government. However, they have different views on how many borrowers may default, especially if there is a severe downturn in the housing market this year. Even if all customers continue to pay their monthly repayments, the bank's inability to raise funds means it is insolvent without the government loan. Previous bidders have said the bank was worthless and they would only invest in it if it was given to them for not much more than 1p a share.

Is there a deadline?

The government will need approval from the European commission if it remains involved in the bank beyond mid-February. The commission needs to be satisfied that Northern Rock does not receive state aid.